Managing the economy - Time for a new solution

The recession that was caused in no small part by the financial crisis shows no sign of nearing an end. If there is a glimmer of light in the UK coming from the end of the tunnel, it might prove to be a very long tunnel.

The latest news from around the world does not create much optimism that we will come out of the recession any time soon.

Unemployment across the single currency Eurozone has reached record highs

Chinese growth appears to be slowing

Managing individual economies has become increasingly complex over the last few decades as international trade and international banking have caused the economic problems of individual nations to reverberate around the world. Historically the international impact would usually be no more than ripples. Foreign exchange rates would then fluctuate and help to provide a local solution by making exports cheaper.

In the world of today the international nature of markets and banks has made the problems more widespread and in turn more severe. With the current fragile state of national economies and international banks the ripples have become waves that threaten to have a knock on impact like a house of cards.

The economists of today have a standard set of tricks up their sleeves. In simple terms, they look at statistical indicators such as employment levels and inflation rates or price indices to gauge how the economy is doing. Based on a belief that the availability of money acts like a tap to stimulate or dampen economic activity, the strategy usually employed is to play with interest rates to encourage or discourage borrowing. With interest rates already having hit rock bottom then money supply must be influenced directly by the Central Bank to stimulate the economy hence quantitative easing.

The coalition came into power with a supposedly unavoidable austerity package. The opposition suggested that they would have handled the situation but it is hard to be certain what they would have done if in power when faced with the reality of the impact of their decisions. If as some believe policy is made by the Civil Service and then wrapped to match the colour of the politicians would their strategy have been that different.

It is important to realise the important since of confidence in the behaviour of markets, particularly financial markets. With every more complex markets, the players in the market place look for ways to make decisions using information provided by specialist information gatherers. Credit ratings re given to all major business to provide an indication of the risk associated with lending money. These credit ratings are also applied to countries. Most countries look to increase their borrowing through the international market place. If the credit rating is poorer then the risk is considered to be higher and so the interest rate, the cost of borrowing money, is higher.

Before the monetarist approach to managing the economy, there was a strong belief that the government should spend money to create jobs that in turn would increase overall disposable income and stimulate the economy.  There are at least a couple of weaknesses in this strategy. Firstly, the jobs need to be sustainable employment to have a long term impact. This is much harder to achieve than digging holes and filing them in again. Secondly the increase in spending would create a need to borrow more money. After several years of a flourishing economy, the country should have low borrowing and be in the position to raise funds for growth. However this is not the case.

An alternative way to raise funds is to increase the money flowing into the Teasury through taxation and similar sources. Historically the UK has been a good place to trade though not cheap in tax terms.
This has encouraged tax avoidance which is legal planning within the law to reduce exposure to taxation. This should not be confused with tax evasion which is illegal.

Is it not now time to move away from the Civil Servants and look to find a new understanding of  the international play of markets in the 21st Century and the implementation of new approaches to stimulate the economy? This needs to be a worldwide approach with a combined commitment to  work.

European unemployment reaches new high

(Reuters) - Unemployment has reached a new high in the euro zone and inflation remains well below the European Central Bank's target, stepping up pressure on EU leaders and the ECB for action to revive the bloc's sickly economy.

Joblessness in the 17-nation currency area rose to 12.2 percent in April, EU statistics office Eurostat said on Friday, marking a new record since the data series began in 1995.

With the euro zone in its longest recession since its creation in 1999, consumer price inflation was far below the ECB's target of just below 2 percent, coming in at 1.4 percent in May, slightly above April's 1.2 percent rate.

That rise may quieten concerns about deflation, but the deepening unemployment crisis is a threat to the social fabric of the euro zone. Almost two-thirds of young Greeks are unable to find work, exemplifying southern Europe's 'lost generation'.

Economists and policymakers including Germany's finance minister, Wolfgang Schaeuble, have said the greatest menace to the unity of the euro zone is now social breakdown from the crisis, rather than market-driven factors.

In France, Europe's second largest economy, the number of jobless rose to a record in April, while in Italy, the unemployment rate hit its highest level in at least 36 years, with 40 percent of young people out of work.

"I've sent CVs everywhere, I come to the unemployment agency every day, for 3 or 4 hours to look for work as a truck driver and there's never anything," said 42-year old Djamel Sami, who has been unemployed for a year, leaving a job agency in Paris.

Thousands of demonstrators from the anti-capitalist Blockupy movement cut off access to the ECB in Frankfurt on Friday to protest against policymakers' handling of Europe's debt crisis.

Some economists believe the ECB, which meets on June 6, will have to go beyond another interest rate cut and consider a U.S.-style money printing program to breathe life into the economy.

"We do not expect a strong recovery in the euro zone," said Nick Matthews, a senior economist at Nomura International in London. "It puts pressure on the ECB to deliver even more conventional and non conventional measures."

In the past, the euro zone has needed economic growth of around 1.5 percent to create new jobs, according to Carsten Brzeski, an economist at ING. With the Organisation for Economic Cooperation and Development forecasting this week that the euro zone economy would contract by 0.6 percent this year, unemployment is set to worsen long before it turns around.

"We do not see a stabilization in unemployment before the middle of next year," said Frederik Ducrozet, an economist at Economist at Credit Agricole in Paris. "The picture in France is still deteriorating."

5.6 MILLION YOUNG JOBLESS

ECB President Mario Draghi, whose pledge to buy the bonds of governments in trouble helped protect the euro zone from break-up last year, has so far left the onus on governments to reform.

A majority of economists polled by Reuters do not expect the ECB to cut its deposit or main refinancing rates soon, although the OECD this week called for the bank to consider printing money for asset purchases to revive growth.

ECB policymaker Ignazio Visco said on Friday it stood ready to take further action but that monetary policy alone could not solve the euro zone's economic problems.

The Commission, the EU's executive, told governments this week they must focus on reforms to outdated labor and pension systems to regain Europe's lost business dynamism, shifting the policy focus away from debilitating budget cuts towards growth.

EU leaders are expected to put the problem of joblessness at the forefront of a summit in Brussels at the end of June.

European Council President Herman Van Rompuy, who chairs the meetings, said last week youth unemployment was one of the most pressing issues for the 27-nation European Union as a whole.

Ministers from France, Italy and Germany called this week for urgent action to tackle youth unemployment, with Schaeuble describing it as a "battle for Europe's unity" and warning of revolution if Europe's welfare model is abandoned.

In April, 5.6 million people under 25 were unemployed in the European Union, with 3.6 million of those in the euro zone.

Even if governments take on unions and vested interests to enact reforms, they will take time to produce benefits.